By Diep
Ngoc Pham and Nguyen Dieu Tu
Uyen
Bloomberg News
Sunday, Jul 14, 2013
http://www.bloomberg.com/news/2013-07-14/granny-s-gold-bars-are-key-to-v...
HANOI, Vietnam -- The
target of Vietnam's campaign to stabilize its currency is in the locked
bedroom wardrobe of retired civil servant Vu Thi Huong: gold bars.
"It's been my habit
for ages, buying gold whenever I can save up some money," said Huong, 57, who watches the financial news every day to
monitor the price of the precious metal. "With gold, I can save my
fortune and later on have something valuable to pass down to my children and
grandchildren."
Huong is among millions of Vietnamese
who hold an estimated 300 to 400 tons of bullion to store their wealth --
valued at as much as $19 billion at domestic prices and equal to official
U.K. holdings -- a legacy of more than a century of war, revolution, and economic
turbulence. The central bank wants to convert the hoard, much of it smuggled
in, into dong deposits to strengthen the currency, which has slid 21 percent
against the dollar in five years.
Private gold holdings "reflect both the Vietnamese cultural values as
well as the lack of confidence in the dong," said Trinh Nguyen, Hong
Kong-based economist at HSBC Holdings Plc. "High inflation and
depreciation of the dong in the past have caused people to keep their savings
in gold."
Demand for bullion
prompts importers and smugglers to sell dong for dollars to buy gold from
abroad, depressing the local currency, Michael Kokalari
and Hang Vu, analysts at Maybank Kim Eng Securities in Ho Chi Minh City, wrote in a note July
3.
To reduce contraband and
persuade people to sell their bullion, the central bank made itself the sole
importer and Saigon Jewelry Co. the only legal producer of gold bars. To
discourage people from holding the precious metal, it banned banks from
paying interest on gold deposits from June 30. Banks now have to charge
customers a fee for storing it instead.
"The gold policy
really is to help stabilize the dong because if people hold less gold, they
don't try to move away from the dong," said Alan Pham, chief economist
at VinaCapital Group in Ho Chi Minh City. "The
side effect of that policy is increasing the amount of capital. That's like
hitting two birds with one stone."
Monetizing private gold
holdings isn't the only measure the State Bank of Vietnam is pursuing to
shore up the dong and increase cash deposits with lenders. The central bank
said it will set up an asset-management company this month to buy
non-performing loans from banks "to resolve bad debts and boost credit
growth to a reasonable level to support the economy."
Extensive use of gold and
dollars is hampering the central bank's ability to manage monetary policy,
HSBC's Nguyen said. "The holding of gold does not generate productive
investment."
While the central bank
devalued the dong last month for the first time since 2011 as the dollar
strengthened, it cut the interest-rate cap on dollar deposits to discourage
people from holding U.S. currency and help boost foreign-exchange reserves.
Other countries with
large private gold holdings are also trying to wean citizens off bullion.
India, the biggest gold consumer, has increased import duties and a trade
group called for suspension of sales of coins and bars to retail investors to
help narrow a record current-account deficit that pushed the rupee to an
all-time low. During the Great Depression in 1933, President Franklin D.
Roosevelt banned U.S. citizens from hoarding gold, forcing them to sell to
the Federal Reserve.
"The State Bank of
Vietnam can buy gold to pump out dong to serve as funds for socio-economic
development," Nguyen Quang Huy,
head of the foreign-currency management department, said on state television
July 4. The central bank didn't respond to written questions from Bloomberg
News about its gold policy.
Vietnam's central bank
wants to convince savers that it's more lucrative to hold assets other than
gold, which means boosting their confidence in the dong, said an SBV official
who asked not to be identified as the plans are still being discussed.
That argument has been
helped in the past nine months by a 27 percent slump in the world gold price,
compared with a 1.8 percent drop in the dong against the dollar in the same
period. Before the metal began to decline last October, its price more than
quadrupled in a decade, while the dong slid 27 percent.
Gold deposits at
Vietnam's banks dropped 75 percent as of the end of May from the end of 2012,
according to a June 12 statement on the government's website.
Still, Vietnam's affinity
for gold, combined with the central bank's rules restricting imports, mean
Vietnamese buyers paid a record premium of more than 6 million dong per tael ($235 an ounce) over the world price in April when
the precious metal tumbled into a bear market.
The differential between
world and domestic prices encourages smuggling. About 50 to 60 tons of gold
were legally imported to produce bars each year in Vietnam prior to 2012,
while some 50 tons to 70 tons were smuggled in, according to a central bank
report this year.
Vietnam bought 77 tons of
gold last year, both legal and smuggled, down 24 percent from 2011, the
producer-funded World Gold Council said in a report in February. The U.K.'s
official holdings in July were 310.3 tons, the World Gold Council said.
"These habits are
deeply ingrained," said Jonathan Pincus, an
economist with the Harvard Kennedy School's Vietnam Program in Ho Chi Minh
City. "It's going to take a long time."
The central bank's
bullion rules combined with price swings in the gold market are starting to
affect people's attitude toward the metal, particularly in larger transactions
such as property deals, said Nguyen Van Doanh, 39,
a real estate broker in Hanoi since 2005.
"In the past, gold
prices were pretty stable. Everything with a large value such as houses,
land, and cars were priced in gold," Doanh
said. "iven the changes in gold prices,
together with the government restrictions in gold-bar trading, it's no longer
safe and convenient to use."
Nguyen Thuy Huong, 64, is marketing
her five-story house in downtown Hanoi for 7 billion dong ($330,000). She
bought the house seven years ago for 190 taels of
gold.
"I can't price it in
gold since nobody would want to pay in gold these days," said Huong, pointing at the advertisement of her home in a
local newspaper. "If someone wants to pay me in gold, I'm not going to
take it either."
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